United Bank of India crossed a milestone of Rs.2 trillion of business (that is deposits and advances—an Indian way of calculating “total business”) in September 2013. Its website carries a tagline of “The Bank that begins with U”. But you may not be able to borrow from the Kolkata-based bank any more as it doesn’t seem to have any choice but to stop lending.
Yes, after posting a Rs.1,238.08 crore loss in the December quarter, following a Rs.489.47 crore loss in the previous quarter, United Bank’s net worth has been eroded substantially and its capital adequacy ratio dropped to around 9%, the floor level. What’s more, its tier I capital, or equity and reserves, has dropped below 6%. Following this, the public sector bank will not be able to give loans any more for lack of capital.
In December, its loan book was close to Rs.79,000 crore, lower than the Rs.81,000 crore in September.
The Reserve Bank of India (RBI) ordered a forensic audit of the bank’s books late last year and restrained its management from giving high-value loans after the bank announced a Rs.438 crore loss and a 50% jump in gross bad loans in the previous quarter. But its health deteriorated further in the December quarter with gross bad assets crossing Rs.8,500 crore and touching 10.82% of advances.
If one includes restructured assets, the pile of bad assets in United Bank will cross 20%.
Till the bank reports a profit or the government infuses capital, it will not be able to give fresh loans to companies and home loans and car loans to individuals. Till good days return, it may be forced to disburse only small loans under the so-called priority sector lending. Of course, it will continue to buy government bonds. That’s what typically a weak bank does as buying zero-risk government bonds does not require capital support. While that keeps a weak bank alive, it delays its revival as income drops. United Bank’s fee income is not enough to support it in trying times.
Formed in 1950 with the amalgamation of four banks—Comilla Banking Corp. Ltd, Bengal Central Bank Ltd, Comilla Union Bank Ltd and Hooghly Bank Ltd—United Bank is one of the 14 major banks that were nationalized in July 1969.
At the time of nationalization, it had 174 branches, Rs.147 crore of deposits and Rs.112 crore of advances. Now it has at least 2,000 branches, Rs.1.1 trillion of deposits and Rs.97,000 crore of advances, but what it lacks is capital. Known as the ‘Tea Bank’ because of its age-old association with the financing of tea gardens, United Bank is now facing the worst crisis in its history. Of course, it will not die as “U” will come to its rescue. Yes, prepare to see its bailout using tax payers’ money.
On Monday, the United Bank stock dropped 6.29% to close at Rs.26.80, its lifetime low.
